3 reasons why the GBP may fall even lower – Deutsche Bank

“1. Purchasing power parity, which evaluates the exchange rate equivalent to the price of “Big Mac”, between the two countries. Britain is experiencing a shock, which suggests that the GBP will reach the extreme historical undervaluation.

2. An alternative metric – a fundamental effective exchange rate. It estimates the rate needed to restore the country’s current account deficit to equilibrium, which we define as 20-year historical average, or in absolute annual terms, around 40,000,000,000 GBP, or 2.5% of GDP.

3. The main value of the assets. What exchange rate will make the British assets “cheap” again to attract capital inflows needed to finance the current account deficit. We consider the housing market in London, estimated in dollars and euros, as a measure of Britain’s international assets and assume that “cheap” is the return of housing prices to the adjusted currency of 2005 level.

Thus, GBP has the potential for further reduction.

We expect the GBP / USD and EUR / GBP will reach 1.15 and 90 pence to the end of the year. ” – Experts DB say.